Everything about the Small & Medium Enterprise (SME) IPO

Did you know that most of the multibagger stocks arise from the SME sector? Market veterans such as Rakesh Jhunjhunwala, Vijay Kedia always look for companies from the SME sector which have potential to become multi-baggers in the future.

The SME sector plays an important role in the Indian economy. SME sectors contribute 45% of total industrial output and 40% in total export of India. Majority of Indian population still lives in rural areas and Tier1/Tier2 cities, and the SME sector gives employment to 60 million people and adds around 1.3 million jobs per year.

Statistics show the importance of the SME sector in India. SMEs sectors (including micro-enterprise) have around 30% share in GDP of India.

Let's understand the SME sector and the importance of SME IPO: 

Classification of the MSME sector as per government policy from 01/07/2020

Meaning of SME IPO

SME IPO is the IPO of SME sector companies on the BSE SME and NSE SME (EMERGE) platforms as per the rules and regulations set upon by SEBI. These platforms provide a business-friendly atmosphere, which allows the listing of SMEs from the unorganized sector to spread all over India.

As per the BSE website, the market statistics of BSE SME as on 28/01/2021 are 

In January, the BSE signed a memorandum of understanding (MoU) with the Government of Maharashtra to create awareness about the advantages of listing on stock exchanges among SMEs of the state.

Eligibility Criteria for listing at SME platform

The procedure of SME IPO on the stock exchanges

• The SME has to hire a merchant bank for advisory and consultation in the IPO process.
• The merchant bank evaluates documents of the company such as financial documents, details of promoters, etc. 
• After completing the due diligence and documentation of the SME, the merchant banker will draft a prospectus and DHRP and file it with SEBI for approval. 
• The stock exchange will verify the documents and will process it upon finding those satisfactory.
• The SEBI and stock exchange will verify the documents and all other requirements for the IPO. If the company satisfies all the requirements, then only their documents will get processed.
• The promoters of the SME will be requested for an interview with the Listing Committee on satisfactory completion of documentation and then issue an in-principle approval.
• On satisfactory completion of documentation, promoters of the SME will be called for an interview with the listing committee, and SEBI will approve their request. 
• After that, the merchant bank will file a prospectus with ROC. It will also include opening and the closing date for IPO. 
• After getting approval from ROC, the company will provide the required documents and opening date of the issue to the stock exchange.
• IPO will open and close for the public as per the schedule. 
• After that, SME will submit the documents to the stock exchange for an allotment.
• When the shares will be allotted, notice will be issued regarding listing and trading of shares.

Benefits of SME IPO

SME capital markets have helped many SME companies. From its introduction in 2012, there have been more than 300+ listings on BSE SME and 180+ listings on NSE SME (EMERGE). The exchanges give them relaxation in norms which makes the SME listing easy, cheap and less time-consuming.

The SME platform will provide listed companies with long term institutional risk investors who are interested in expanding the market of India. 

By listing companies on the SME platform, a company has opportunities to grow in size, value and migrate to a mainboard platform with more broad-based IPOs. 

Problems in the SME sector

Despite the significant contribution of the SME sector in the Indian economy. SME sectors face significant challenges. Some of them are: 

• SME sector face a problem of lack of capital because of insufficient access to finance and credit
• They are mostly incapable of attracting talented and technology-driven manpower
• Due to poor infrastructure and utilities, they face a problem of low production capacity
• Due to lack of funding, they face a challenge of lack of innovation
• Improper utilization of technology 
• Insufficient marketing tactics

Due to these problems in the SME sector, most of the time, they don't operate with full potential, are not capable of matching international standards and are self-dependent.

The government is also working to meet these problems with schemes such as Skill India, Make in India, Start-up India, Pradhan Mantri MUDRA Yojana, Public Procurement Policy to aid development and innovation in the SME sector, which has led to positive growth in the agricultural, manufacturing and service industry. 

Final Thoughts

The SME listing is important for the SME sector. With the encouragement of the government and exchanges, many companies have listed themselves on the stock exchanges, which has helped them in getting more capital, expanding business size, getting loans against shares and having the prestige of becoming public.

For an investor, evaluating these SME stocks and making a well-thought-of investment will give them a chance of investing in potential multibagger stocks. And of course, before coming to any decision of investing in a company, the investor should see the pros and cons of the company along with its growth possibilities in future and then decide wisely.